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An exchange with commercial substance is one where the company is expected to have a change in future cash flows because of the change, whereas an exchange which lacks commercial substance is one where the company is not expected to have a change in cash flows. The difference in the journal entries is that if there is commercial substance, the new item will be recorded at fair market value and there will often be a gain or loss on the exchange. When there is a lack of commercial substance, the new item will be recorded at the book value of the exchanged item and no gain or loss is recognized. This can change if cash is involved, though. |
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